The Mettupalayam Co-operative Urban Bank Limited, Tamil Nadu
1. Key Details of Regulatory Action
| Regulator | Reserve Bank of India (RBI) |
| Date of Order | November 11, 2025 |
| Penalty Imposed | ₹1.50 Lakh (Rupees One Lakh Fifty Thousand only) |
| Inspection Reference Date | Financial position as on March 31, 2025 |
| Regulations Violated |
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| Charges Sustained |
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2. Root Cause Analysis (RCA)
The breaches identified point primarily to weaknesses in credit governance, policy adherence, and risk culture within the Bank’s lending processes.
A. Director-Related Loans
- Lack of Governance Oversight: Failure of the Board of Directors and Credit Committee to strictly enforce the statutory prohibition (Section 20 of the BR Act, 1949, as applicable to UCBs) on sanctioning loans to directors, their relatives, or related concerns.
- Deficiency in Due Diligence: Inadequate identification of ‘related parties’ during the loan application and appraisal process. This includes failing to map relationships (relatives, firms, and concerns) as defined by RBI Master Directions.
- Internal Policy Gaps: The internal loan policy documentation may not have clearly articulated the absolute ban on such lending or the defined exceptions, leading to misinterpretation by sanctioning authorities.
B. Excess Lending to Nominal Members
- Systematic/Technical Failure: Lack of automated, real-time control within the Core Banking System (CBS) to prevent the disbursement of loan amounts exceeding the specified regulatory limit for nominal members, as prescribed under Exposure Norms.
- Process Failure (Manual Check): Reliance on manual checks or post-sanction verification, which failed to identify the cumulative exposure of nominal members before the loan was disbursed.
- Absence of Aggregation Logic: Inadequate mechanism to aggregate all outstanding loans against a single nominal member across all branches/loan products to ensure adherence to the exposure ceiling.
3. Enhanced Preventive Controls
A. Governance and Policy Controls
- Mandatory Annual Certification: Implement a mandatory annual declaration by all directors, KMPs, and senior management confirming non-involvement in director-related loans, either as a borrower, relative, or guarantor.
- Independent Board Review: Mandate a quarterly review by the Audit Committee of the Board (ACB) or the Board of Management (BoM) focusing specifically on all high-value loan sanctions to verify compliance with related-party restrictions and exposure norms.
- Refresher Training: Conduct mandatory, high-intensity training sessions for all credit sanctioning officers and Board/Committee members on the “Loans and advances to directors” and “Exposure Norms” Master Directions every six months.
B. System and Operational Controls (CBS Enhancements)
- Related Party Mapping Module: Develop and integrate a dedicated module in the CBS that automatically flags a loan application if the borrower or the connected entity is identified as a ‘related party’ based on the pre-fed database of directors and their relatives.
- Hard Stop for Nominal Member Limits: Implement a system-level “hard stop” control that automatically prevents the final sanction or disbursement of any loan to a nominal member if the cumulative outstanding balance exceeds the regulatory limit prescribed by the RBI.
- Pre-Disbursement Compliance Checklist: Institute a digital, mandatory pre-disbursement checklist within the loan processing workflow that must be signed off by a Compliance Officer, specifically confirming adherence to nominal member limits and non-related party status.
4. Lessons Learned and Future Strategy
The penalty serves as a critical reminder that compliance is a function of both intent and flawless execution, particularly in areas susceptible to conflicts of interest (Director-related loans) and concentration risk (Nominal Member limits).
- Compliance Automation is Non-Negotiable: Over-reliance on manual verification for critical prudential limits must cease. Core regulatory restrictions must be embedded as “hard stops” within the Core Banking System (CBS).
- Prioritize Conflict of Interest Risk: The prohibition on director-related loans is statutory. Any violation, regardless of size, signals a severe weakness in the bank’s ethical and governance framework, demanding immediate remediation and Board accountability.
- Proactive Monitoring: Move from post-facto detection (via annual audit/inspection) to continuous, real-time monitoring of all exposure ceilings, particularly those affecting non-standard membership classes like nominal members.
- Strengthen Internal Audit: Direct the Internal Audit team to specifically include the verification of director-related party transactions and nominal member exposure limits as a high-risk item in their regular audit program, checking transaction samples on a quarterly basis.